1. 1 Economic Research Department 1The New International Financial Map for LAC Alicia García-Herrero Chief Economist Emerging Markets Economic Research Department, BBVA 22 October 2009 October 2009 Economic Research Department

2. 2 2The New International Financial Map for LAC Although competition for financing will increase – as a consequence of higher indebtness of developed economies – emerging countries should benefit – in terms of returns and probably quantity of financing - for a much improved perception of their economies However, more of the financing will come from emerging countries themselves, which plays a certain amount of adjustment in terms of attracting capital Finally, the whole idea of separating industrial and emerging countries (core and periphery is to disappear. No free asset from the core any longer. Each asset to be evaluated against its own risk Main Theses

3. 3 Economic Research Department 3The New International Financial Map for LAC 1. Risk Reward Considerations in post-crisis developed economies a. Risk perceptions have increased b. Returns are revised downwards 2. Risk Reward Considerations in post-crisis emerging economies a. Risk has not increased (have they instead fallen?) b. Although with exceptions, returns are not revised downwards. 3. Pending challenges for Emerging Economies Index

4. 4 Economic Research Department 4The New International Financial Map for LAC a.- Risk perceptions have increased: The crisis had its roots in advanced markets, due to an undervaluation of risks. Although the possibility of a systemic failure has waned, some significant risks still linger, at times at a fairly high level. Risk Reward Considerations in post-crisis developed economies

5. 5 Economic Research Department 5The New International Financial Map for LAC Risk Reward Considerations in post-crisis developed economies b- Returns in developed markets are revised downward, due to: 1. Lower potential growth in the future Higher uncertainty, risk premia, and tighter financial conditions impose limits on capital accumulation Increasing unemployment could lead to higher structural unemployment (hysteresis effect). The long term effect of stabilization policies can also lead to increase in government size and in public debt levels: crowding out of private sector

6. 6 Economic Research Department 6The New International Financial Map for LAC Risk Reward Considerations in post-crisis developed economies 2-Regulatory constraints

7. 7 Economic Research Department 7The New International Financial Map for LAC Risk Reward Considerations in post-crisis developed economies 3-Deleveraging of financial system Total assets over

8. 8 Economic Research Department 8The New International Financial Map for LAC Risk Reward Considerations in post-crisis developed economies 4-Interest rates will remain at very low levels for a significant period of time (BBVA projects hikes will resume in 1Q11 for US and 3Q11 for Euro area)

9. 9 Economic Research Department 9The New International Financial Map for LAC 1. Risk Reward Considerations in post-crisis developed economies 1. Risk perceptions have increased 2. Returns are revised downwards 2. Risk Reward considerations in post-crisis emerging economies 1. Risk has not increased (has it instead fallen?) 2. Although with exceptions, returns are not revised downwards. 3. Pending challenges for Emerging Economies Index

10. 10 Economic Research Department 10The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies Risk perception of emerging countries have not increased in a structural way, still lower than its average during previous year and much smaller spike that global risk aversion indicator would show

11. 11 Economic Research Department 11The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies Banking sectors in emerging countries have coped rather well with the crisis: 1- Financial institutions in the emerging world have had marginal exposure to toxic assets, leading to a much lower number of write downs in the emerging world. 2- Prudential and solvency ratios have not deteriorated. 3- Collapse of credit markets led to a successful substitution for domestic sources of funds in some cases (particularly in Latin America), along with the appearance of new financing sources (i.e., China).

12. 12 Economic Research Department 12The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies Monetary authorities have been very active in buffering the impact, through a historically expansive monetary policy both through orthodox and heterodox measures (reserve requirements, etc)

13. 13 Economic Research Department 13The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies Multilateral support has been more flexible and timely (FCL). Other sources have emerged:FED swap to “systemic” countries and increased in swaps in Asia (Chang Mai Iniatitive) Latin America: Reserves and Financing Facilities (%GDP) -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 ArgentinaBrasilChileColombiaMéxicoPerúVenezuela Reserves IMF FCL Swap Fed Current Account Balance

14. 14 Economic Research Department 14The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies Foreign banks have maintained their commitment even in the more difficult countries

15. 15 Economic Research Department 15The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies Regulation is improving without a clear worsening in competition forces 1- Enhancing liquidity provision through reducing reserve requirements 2- Favoring credit dynamism through public guarantees, subsidies to mortgage interest rates, and discretionary measures for SMEs. 3- Some introducing macroprudential regulation (dynamic provisioning, new guarantees on banks’ external indebtedness).

16. 16 Economic Research Department 16The New International Financial Map for LAC 1. Risk Reward Considerations in post-crisis developed economies 1. Risk perceptions have increased 2. Returns are revised downwards 2. Risk Reward considerations in post-crisis emerging economies 1. Risk has not increased (has it instead fallen?) 2. Although with exceptions, returns are not revised downwards. 3. Pending challenges for Emerging Economies Index

17. 17 Economic Research Department 17The New International Financial Map for LAC The sovereign has been losing ground as the main client of external financing. Sovereign: lower financing needs, and also better considered by international investors. No longer considered risky “by default”. Thus, multilateral support has been more available, with better conditions. Increasing importance of corporates as the main demander of financing. No more risk free(trustable) benchmark Emerging corporates may abandon their periphery position More o f a case by case situation Financing dynamics in emerging markets: sovereign vs. private agents

18. 18 Economic Research Department 18The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies 1. In that regard, Foreign Funding model by domestic banks but also foreign affiliates has been put in question 2. Domestic management of liquidity has proven superior: this would act as a powerful incentive for the development of interbank markets and a large deposit base. 3. Pension systems development should continue (or basically start in Asia) as a powerful to develop domestic financial markets

19. 19 Economic Research Department 19The New International Financial Map for LAC Risk Reward Considerations in post-crisis emerging economies 3. For some economies, there is a need to address efficiency and risk-management issues derived from: 1. Public sector interventionism in the financial system 2. Links between banks and non-financial corporations under a same business conglomerate.

20. 20 Economic Research Department 20The New International Financial Map for LAC Alicia García-Herrero Chief Economist Emerging Markets Economic Research Department, BBVA 22 October 2009 October 2009 Economic Research Department